Does American Manufacturing Expertise Now Reside at Fast Food Restaurants?

Includes: MCD, WEN, YUM
by: The Operations Room

By Marty Lariviere

So if you wanted to demonstrate to a foreign guest that America still has true manufacturing prowess where would you go? What firm would you hold up as the epitome of American manufacturing know how? BusinessWeek makes the case for Taco Bell or, indeed, any of the major fast food (excuse me, quick service) chains (Taco Bell and the Golden Age of Drive-Thru, May 5).

Here the crux of the argument:

Go into the kitchen of a Taco Bell today, and you’ll find a strong counterargument to any notion that the U.S. has lost its manufacturing edge. Every Taco Bell, McDonald’s (NYSE:MCD), Wendy’s (NYSE:WEN), and Burger King is a little factory, with a manager who oversees three dozen workers, devises schedules and shifts, keeps track of inventory and the supply chain, supervises an assembly line churning out a quality-controlled, high-volume product, and takes in revenue of $1 million to $3 million a year, all with customers who show up at the front end of the factory at all hours of the day to buy the product. Taco Bell Chief Executive Officer Greg Creed, a veteran of the detergents and personal products division of Unilever (NYSE:UL), puts it this way: “I think at Unilever, we had five factories. Well, at Taco Bell today I’ve got 6,000 factories, many of them running 24 hours a day.”

It’s as if the great advances of human civilization, in everything from animal husbandry to mathematics to architecture to manufacturing to information technology, have all crescendoed with the Crunchwrap Supreme, delivered via the pick-up window.

“The most advanced operational thinking in the world is going on in the back of a QSR,” says Mike Watson, a former senior vice-president for operations at Wendy’s and currently executive director of operations engineering at WD Partners, a consulting firm that works with QSR brands. “If you have it laid out where it doesn’t flow right, that means less order flow, less product, lower sales.”

At some level, it may seem depressing to think that so much effort has gone into a market that is in some sense trivial. What could have been done for emergency rooms and ICUs if as much energy and brainpower had gone into their optimization instead of drive-thru lanes? On the other hand, Taco Bell (NYSE:YUM) and its competitors would not have done all that work if the market didn’t want it. Customer clearly value fast cahlupas and quick service firms have done some remarkable work to serve that need.

It is also worth thinking about how the operational challenges of a quick service restaurant differ from your typical manufacturing examples like car assembly or wafer fabs. First, as the Taco Bell CEO notes, is the number of locations. You have thousands of locations and they are all suppose to be doing the same thing. So you need a production system that is robust enough to handle a variety of labor markets and consumer markets. Unlike a Ford (NYSE:F) plant, the neighborhood Taco Bell is unlikely to the be the employer of choice. You may not even be able to count on having top rate managers at all locations. On top of that, you may have systematic differences in what sells well across locations. One system has to handle all that. That they can do it and pop people through the drive thru every 163 seconds with over 90% accuracy is simply amazing.

Now think about how often a car plant changes over models. Sure one plant might build several models on a common platform and do an annual model change. But that model change is largely trivial; major changes happen much more sporadically. Fast food chains, however, compete in part by offering special, short-lived offerings. Thus, product design must be constrained by the production process while still offering the customer novelty.

Finally, you have to deal with customers. You can have staff follow a script but you cannot similarly constrain those that pay. You can try training them like Starbucks (NASDAQ:SBUX) does to recite their orders in the right order but you cannot keep them from changing their mind or from coming through at the lunch rush with large, complicated orders.

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